I have mixed feelings about Prof. Lev’s theory- aren’t you just frontloading the cost of these intangibles into early years resulting in higher profits on books later, so it “all comes out in the wash?”
On paper, Autodesk Inc. is a bit of a mess. It’s been losing money for almost three years, and its book value — what’s left if you sell off the assets and repay debt — is negative. Yet over the past year, the stock has gained 23 percent, almost double the S&P 500.
With its sky-high valuation, the software maker would appear to be a poster child for froth amid a nine-year bull run. But to some, it should be seen in a very different light — as a company whose fundamentals are made to look a lot worse than they are by old, and increasingly useless, accounting rules.
“You get numbers which are highly inflated for some companies, and are understated for other companies,” says Baruch Lev, the New York University finance professor whose 2017 paper on the topic ignited a debate about valuation. “It doesn’t make any sense.”
That talk rankles the old school, which hears it as an apologia for stock prices that seem to be bubbling over. But lumping it with dot-com-era gimmicks like price-to-eyeballs misses a larger point tied to the growing role of services in developed countries. As the economy changes, proponents say, accounting standards that made sense for shipbuilders and oil drillers are bound to lose relevance.